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Investing Like the Ultra Rich feat. Paul Karger

An exclusive look into the world of wealth management for individuals with net worth ranging from 100 million to a billion dollars, offering insights on asset allocation, liquidity management, and achieving the delicate balance between risk and reward. Paul brings these complex strategies down to a level accessible for those not yet at the 100 million-dollar mark, demonstrating how anyone can invest like the ultra rich.

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Ben Fraser: Hello, Future Billionaires! Welcome back to the Invest Like a Billionaire Podcast. We’ve got a really fun episode today. I interviewed a gentleman named Paul Karger. He’s the founder of Twin Focus, which is an advisory firm for ultra high net worth clients. So he manages over 7 billion of assets with about 40 families.

So he is working with the ultra high net worth, the one hundred million to a billion dollar net worth families. And he breaks down. How they look at allocation, how they manage liquidity, how they balance out risk and reward and return. And really brings it down to a level of folks that, like us, are not quite at the hundred million dollar level yet.

And how we can apply some of these tactics and strategies and approaches that the ultra wealthy are using in our own portfolio. So you don’t want to miss this episode. He also gives a lot of insights into the current market and where he’s seen opportunities. And I think you’re really going to enjoy this episode. So tune in and listen to the whole thing. 

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Welcome back to the Invest Like a Billionaire podcast. I am your host, Ben Fraser, and today we’re joined by Paul Karger, and I’m very excited to have this conversation with Paul.

TwinFocus, which is an advisory. For ultra high net worth families and really excited to bring him on as a CFA, a charter holder and has really been working in this space for many decades and brings a real breadth of experience to his clients and really really excited to dive into, the nuances of what you do because it’s really into our thesis of this podcast, which is.

Investing like the ultra wealthy and what we’ve seen through a lot of the research is the ultra wealthy investors, a lot of the clients that you serve are investing differently than maybe a lot of just retail investors that are, 60, 40 stock bonds, most ETFs and all retirement accounts.

And Paul, give us a little bit of background on how you came into the space that you’re in and give us a little preview of the types of clients and families that you work with. 

Paul Karger: Sure. Ben, great to be here. Thanks for having me. Great. Great to be with you again. So as you mentioned, I started a firm about 17 years ago called Twin Focus.

I was previously an investment advisor working with high net worth clients at UBS. I started my career in the late nineties at a firm called Payne Weber, which is a classic old American brokerage firm that was subsequently acquired by UBS. And the reason I’m giving you some background is. I cut my teeth working with high net worth, affluent families.

And it wasn’t really until I launched Twin Focus later in my career that I had the opportunity to work with much wealthier clients. I myself did not grow up with extreme wealth. I grew up in a lower middle class family and environment. And so I didn’t have the experience of having firsthand experiences with family wealth. But certainly over the last couple of decades I’ve gotten very close to the families I work with, and I’ve seen all sorts of shapes and sizes of situations and issues and problems and helped these clients think through those issues and problems. And, many of these issues and challenges touch the balance sheet.

And, at Twin Focus, we take a real kind of total balance sheet approach where we’re helping our clients think truly across their global balance sheet, not just about specific portfolios or specific investments, which frankly we think is the most important when you’re dealing with ultra high net worth families.

And even affluent families because day to day decisions impact your balance sheet and your balance sheet impacts day to day decisions, so they really need to be thought of. Hand in hand I think, getting right to the chase here I think that, the major difference with the ultra net worth, the 100 million plus type families is because of their significant asset base.

They can take on typically significantly more illiquidity. And hopefully be paid for that illiquidity and in the same vein, they can think truly long term. And, so I think, when you’re relating it back in families that may have less money, a lot of the same principles apply you just need to size down decisions.

And, as we say to the wealthy families that we work with all the time when we’re making investment decisions. We don’t really want to fall in love with any particular investment and we want to ensure that everything’s well sized in their life. So it’s meaningful enough where if it works out and it’s a meaningful contributor to performance and your net worth.

But if it doesn’t work out it’s not going to change your lifestyle and you’re not going to be on the park bench. So those are the things that we keep in mind from a macro perspective. 

Ben Fraser: I love that. I think there’s so many nuggets there that we’re excited to dive into what you just said there.

And one of the first things that kind of strikes me, as you mentioned, a total balance sheet approach, right? And I think I’ve talked about this a little bit on prior podcast episodes, but as I’ve talked with some of these kinds of families and clients as well, and have studied what do the ultra wealthy do?

They adopt what I call a balance sheet mindset versus just an income statement mindset, right? And I think so many times, as we’re focused maybe on our careers or our businesses, we’re focused on how do I maximize the income that I’m generating, right? But generally by doing that. You are maximizing your tax liability, you’re maybe not thinking long term, you’re not leveraging the other assets that you use, and you’re not having this holistic approach of, like you said, building for the long term.

Breakdown, when you’re saying, we want to look at the whole balance sheet, talk to me about what that means from not only a practical standpoint, but even a mindset standpoint of how they are thinking differently, right? If you’re thinking of leveraging your balance sheet, how is that different than maybe.

Okay. I’m just going to try and get a higher return on this investment or I’m going to try and maximize my earned income this, calendar year. 

Paul Karger: Yeah. That’s a great point. I think it’s often, people say it’s the difference between saving and building wealth.

I think about my own position, grinding it out and building a big business to become big over time. In the beginning, it’s hand to hand combat and you’re trying to get client by client and you’re trying to earn money, but slowly over time as you build a business, for example, and while you may be increasing your income, you’re also building the value of that business.

Inherently you’re building your own net worth.

With high net worth families, most of the folks that we work with generated the wealth themselves. We have a handful of clients that are legacy wealth families. However, the majority of the families we work with are what we call G1 wealth. So we work with a lot of entrepreneurs, CEOs, and build their wealth in concentrated ways.

We work with a whole bunch of kinds of private equity executives, hedge fund executives, and money managers. That builds their wealth over time and so on. And, the difference between obviously thinking balance sheet versus income statement is these families have created a large balance sheet. And that large balance sheet gives them the freedom, flexibility to do interesting things.

But it also comes with responsibility. It also needs to be managed. It’s not only managing assets, it’s also thinking about things like taxes, thinking about things responsibly where does this money go when I pass? You can go one of three places, you can go to heirs or, inheritance.

It could go to a charity or it can go to Uncle Sam. You need to think it through. planning around the balance sheet, because between Uncle Sam and between dilution across kids, balance sheets can shrink over time, as it gets passed down from generation to generation, especially if future generations are not focused on expanding the balance sheet or being productive with those assets. Again, the whole balance sheet approach, it’s, part of it is thinking through what types of assets you own, a hundred million dollar family wouldn’t be well served to go buy 90 million of personal residences. In fact, they probably couldn’t afford 90 million of personal residences with a 100 million balance sheet because those properties have ongoing opportunity costs and ongoing operating costs.

And if you’ve got 20 million tied up in a home in some Caribbean Island it’s going to cost you money. And it’s also money that’s not productive because usually primary homes or residential properties, they usually don’t appreciate, certainly not not like investment properties.

So it’s helping clients think they’re not just allocating their assets across stocks and bonds and mutual funds and alternatives, but also what they’re doing with their funds day to day, whether it’s investing with personal businesses, concentrated wealth within a personal business, or maybe it’s a, it’s an executive that has a concentrated wealth position in the stock of the company that he runs.

We’re also helping these clients manage liquidity, which is a big one. I say this all the time to our families. Don’t focus on beating the S& P or beating some benchmark. Optimize for sleeping at night. The market’s going to return what the market’s going to return. And you don’t overthink it.

We could talk about how we allocate capital across public markets versus private, you, you don’t overthink it. And in many areas of your balance sheet, you should just be willing to take what the market’s giving you today. You can get 5 percent worth of 5 percent short term treasuries.

Take what the market’s giving you. That’s, we can have a wider conversation around fixed income today. But it’s really helping these clients manage liquidity and think about their balance sheets from that perspective. Because, I’ve seen many mistakes were people first come into money and they think, I’m gonna go out and buy a bunch of individual homes.

You can only be at one at a time. I promise you, if you rent a fancy home in the Caribbean or something, you rent it, I promise you, they’ll treat you like you’re an owner when you show up. You don’t need to own it, if you’re only going to spend two or three or four weeks there.

The other mistake I see people make when they first come into money is over committing to illiquid investments. You’ve got to, you’ve got to manage that as well, right? Because the world doesn’t always operate like you think it’s going to operate. You may not get liquidity. So you need to ensure that you can continue to operate your life while you’re waiting for those illiquid investments to become liquid again.

Ben Fraser: I love what you’re saying and there’s so much. There to dive into, but at a broader level, it’s really having a plan, right? Understanding where are you at in kind of the wealth accumulation versus wealth preservation spectrum and what’s the best strategy to suit those goals, right? Because to your point, if you’re trying to maximize your sleep at night, maybe you don’t need to go and chase 25 percent IRRs on risky development projects.

You can be happy with some more fixed income, lower risk products. If your goal is just preservation. And what I’ve seen, in, with the clients we work with and in other discussions with people like you is that a lot of families, a lot of wealth is created through concentration of risk, right?

So they’re starting a business and they’re growing a business and the wealth. Is created through the sale of that business or whether it continues to operate to go in concern. But then wealth is preserved through diversification, right? 

Paul Karger: The only free lunch in finance is diversification.

Ben Fraser: Yeah. Is that a common thing that you see with your clients as well? That kind of path, concentration to diversification and what kind of thoughts are there? 

Paul Karger: Absolutely. Typically wealth is created in concentration. You had and you’re, you can take those concentrated bets when you have nothing because you got, you don’t have much to lose, at some point you need to think about diversifying away from that concentration and you’re exactly right.

It’s maintaining diversification across a number of different types of risk exposures and ensuring that those risk exposures are not completely correlated. You don’t realize that until some type of, correlation breakdown, as we call it in technical terms, or some type of market meltdown.

When you see that, a lot of things are correlated to liquidity. So sometimes, those hedges you have in place don’t really provide you much protection when the dude who’s hitting the fan. You really gotta, my partner often says that the best hedge is time. I think the other thing is, for the families that we work with, you can, it’s really hard to find products that can perfectly hedge every type of risk.

Another great hedge is just cash. And cash enables you to be a liquidity provider when others are takers. 

Ben Fraser: Yeah, let’s shift those a little bit, to the allocation kind of standpoint. But before we get there, I’d love to hear your perspective on liquidity because, where we operate is mostly in the private markets and, the biggest knock on private markets is illiquidity, right?

But sometimes, and hopefully, the right deal is that illiquidity. Provides a premium on the market return because you’re willing to potentially hold for longer or you’re not, succumbing to market ebbs and flows based on sentiment and you can execute a business plan.

But the downside is to your point. Things don’t always go according to plan. In fact, that’s probably a guarantee, right? And being able to manage different contingencies and maybe things take longer than expected. And what’s your thought and approach to liquidity, and how do you structure that through cash, like you mentioned, your lines of credit.

And do you have a benchmark or a framework to help process? Here’s a good level that you should have based on. Your portfolio, or is it really very subjective? 

Paul Karger: I think it’s very subjective. I, it’s really a case by case situation. From a real kind of, dumbed down retail perspective, I think it makes sense to have a year’s worth of your operating expenses in the bank.

However, when you’re dealing with high net worth or ultra high net worth families in the balance sheets, it’s different, right? It’s also highly predicated on the environment. Three or four years ago where you were getting no return, everybody was leaning and trying to be fully invested and using credit lines and levering up because that was cheap.

And it was a borrower’s environment and it wasn’t a lender’s environment. That’s all changed. Lastly, over these last few years rates have gone up, they’ve caused a repricing of some kinds of risk across the board, everything from real estate to private equity to growth and so on.

And now all of a sudden there’s an opportunity cost, from a real estate perspective. Why would you be investing in a five cap deal when you can get 5%? You can get north of four today in 10 years and 20 years in four and a half years, right? There’s a 20 year auction today.

There’s a much higher security cost of where rates are today. But it is dependent on what a family’s kind of fact pattern is, do they have an operating business, what are their commitments to privates and stuff they can’t access? Are they going to need to continue to fund those privates or that business or those real estate projects?

So it’s, it changes you were making a, you made a great comment earlier about. Developing a plan, absolutely, you got to have a plan, Mike Tyson says, I always got a plan to punch in the face, but you got to have a plan and frankly, you have to have advisors and no more than, God forbid you go out and get diagnosed with cancer, you’re not going to go to medical school, right?

You’re going to try to learn everything as possible about that type of cancer and what you should be doing and how you should be living, but you’re not going to med school and you’re going to still rely upon doctors to help chart your course. It’s the same way from a wealth perspective.

I sound like I’m preaching my own book here which I am, but I truly believe you’ve got to hire advisors. I’ve got advisors. I’ve got advisors internally and externally in my business and they help solve your blind spots and, more importantly, they help take the emotion out of the decision making process, which is critical.

Sometimes you just lose objectivity when you’re with yourself trying to make decisions. It’s helpful to have an advisor or advisors that can help make those decisions with you. 

Ben Fraser: Now, I think it’s a very wise counsel. It’s. There’s wisdom and having other perspectives, speak into what you’re doing.

And we all have the blind spots and we don’t know what we don’t know. And especially right now as markets are fundamentally changing and risk profiles are fundamentally changing, they’re changing very quickly. The interest rates have increased, the fastest that we’ve seen in recent history.

And so it’s hard to digest. What’s happening, right? And so speaking with people that have had experience through cycles have had broader macro perspectives, right? And I think it’s very wise. Just a little bit. Before we get into more specifics, you made some really interesting points just on risk, right?

And the risk free rate is The highest it has been in many decades, right? So it’s changing a lot of appetite for different types of investments. And in your mind, what are some areas that maybe don’t make as much sense anymore? And then what are some areas that maybe do make more sense as things have shifted in our shifting?

And then layer into that, you’ve mentioned you’ve seen a lot of cash and, a couple years ago everyone was chasing yield and now you’re if you’re the provider of the liquidity maybe you can get that yield, but we also have higher inflation than we’ve had a long time, right?

Inflation erodes the purchasing power of our dollar over time and love to hear your perspective on, where do you think that goes? And if that is higher for a longer, how does that impact a capital allocation plan? Maintain purchasing power. 

Paul Karger: Great questions. So I actually do believe that the Fed is going to stay higher for longer.

I think I’ve been saying it from the very beginning, the market didn’t want to listen earlier in the year. Now the market’s kind of in tune with that and you’re actually seeing the 10 year and the 30 year creep up. So I, I do think we stay higher for longer cause I think the Fed is really resolute about stamping out inflation.

They just don’t want to get caught behind the inflation eight ball like happened in the seventies there in early eighties. Yeah. Yeah. And they’re willing to risk growth and, economic, disruption for that. And so as a result, I think that, I think it makes sense for your really conservative portions of your balance sheet to move out on the yield curve today.

I think you should extend the duration here. I think long term bonds north of four are pretty interesting. I absolutely hear you about inflation. And I think over the next 10 years, I think we’re in a higher inflationary environment. Maybe we’re, I think you’ve got more volatility around inflation, but I think you’re probably at a 3 percent type inflation when the Fed is targeting 2%.

Absolutely you need to take into account when you’re buying, long dating fixed income to ensure you’re outpacing your inflation bargain. You’re not dealing with eroding purchasing power. But I think that the environment is just starting to get interesting. It’s going to take time for the world to come to grips with these higher rates.

There’s certainly some asset classes that adjust pretty quickly. Sure. In real estate, as you and I both know, because we both are in that space to some degree. There’s a lot of stuff that just doesn’t make sense today. It made a lot of sense when you’re building to a five or six and you were financing at three or four and you were getting rent growth at 15 or 20 percent a year.

A lot of that’s been turned. 

Ben Fraser: Those days were all great numbers in the right direction, but not happening now. Yeah. I think I saw a stat the other day that so far this year we’ve had about 20 percent of the transaction volume of the past five year average it says transacted this year.

So we’re seeing. About a fifth of deals happen across all real estate sectors. So it’s just, deals aren’t penciling, right? And sellers don’t want to sell, the asset spread’s too big, no one can. 

Paul Karger: It’s all the things that we know. Interest rates have gone up which is a big challenge, right?

Because… Again, it doesn’t make sense to finance stuff at 8 to 10 percent when you’re building to a 6. Because interest rates have gone up and the banks can’t borrow as much, your LTVs have gone loan to value have gone down, gone up to requirements, they’re requiring more equity. And so to get that equity, it’s either you get the sponsored developer to put in more equity and have to write a bigger check.

Or they go out to the market and get this pref equity which is expensive, 13, 14, 15 percent. And so that hurts the returns of projects. I don’t think it’s going to be like this forever. I think at some point you get some adjustment. You need to mention a wide bid ask spread. At some point, People come to reality and the challenge with real estate is it’s not like the equity market that prices every second.

People pull properties off the market and hold on, I mean on the resi side, for example, and I’m in the market looking every day you’ve got on the resi side, you’ve got, there’s a lot of interesting supply coming on and it’s only really coming on if people have to sell.

Because you got to remember the past five, six, seven years, you financed that residential property in the twos or the low threes. Why would you sell and have to go buy something in a six year sentence? 

Ben Fraser: I think I saw a stat as well, like the amount of mortgages that have a sub 4 percent interest rate, I think is over 70 percent or close to 70 percent of all mortgages are under 4%.

So it’s just, no one wants to sell, right? I’m just going to live with what I’ve got because it’s twice as much to go. 

Paul Karger: Free money. And in this environment, it feels like free money. 

Ben Fraser: Absolutely. Yeah, it’s an interesting conundrum, especially in that side of it where we already have housing shortages and now we’re just taking way more supply off the table and it’s really interesting.

Let’s shift a little bit to private versus public allocations. I’d love to hear, do you have, Kind of portfolio data across all your clients. I think you managed north of three to four billion. Is that right? Or maybe more than that? 

Paul Karger: Seven or so billion for top 40 something families.

Ben Fraser: Okay, perfect. And so do you see any kind of similarities across the portfolios, are there any kind of?

Paul Karger: Yeah. I think that, back to the whole liquidity discussion, you really need to manage liquidity when you’re entering this private investment world. As I say to clients, they don’t realize sometimes when you sign those fund LP documents and you think, Oh, this is going to be a great investment.

You’re literally like getting married, like that thing is going to be on your balance sheet and you’re going to be getting a K1 maybe for 15 years. I’ve still got funds that clients invested in 15, 20 years ago that they’re, we’re still doing tax reporting on. Back to the point about that juice has to be worth the squeeze, right?

You have to pay an accountant to do it, you have to handle capital calls and all the administration around those investments, every year. 

Ben Fraser: And these are probably private equity versus real estate or are they also real estate? 

Paul Karger: All the above. All the above. All the above. Private income funds, private credit funds, real estate funds.

We have a direct real estate investment business, but we also invest in third party funds especially that are super complementary to what we’re doing internally. We don’t do a lot of really hairy stuff. We do right down the middle with fairway type deals on the real estate side. So we will invest in managers that are playing in more esoteric spaces or doing hairier things, looking for higher returns.

The way we go about managing our private exposure with our families is every year when we come into the beginning of the year, we’re looking at the total balance sheet and we have a budget that we can allocate throughout the year into illiquid investments and we manage that budget and when we present our families with a new and interesting illiquid investment opportunity, we tell them where this fits into the portfolio and where this fits into the budget.

Again, where we’re charting out, here’s how we take the capital, it’s going to be called down over time. Here’s how we think we could see some liquidity over time. So that’s most important because I think, back to my earlier comment, I see sometimes new wealth comes in and says, Oh, I got to own private equity.

I got my own venture. And then, within a year or two, they’ve gone and spent their whole nut on private equity and venture. They’re fully allocated. You not only want diversification across sectors and deals and managers, you also want vintage diversification. The money that went to work in 2001, probably not going to be a great vintage, the money going to work in, 23, 24, pretty interesting. Deals, deal pricing has come way in, and both in real estate, we’re starting to see some adjustments there, but also in the private equity side and the venture side. So you really want that diversification. Every family’s different in terms of what kind of allocations we have.

I have a family that has a huge cash flow business, a big commodity business. And as a result, the majority of their portfolio is illiquid. But they can take that illiquidity risk where they think they’re going to be rewarded because they’ve got cash flow and cash flow is not a concern for them. I have other families.

that are really bound at 10%, for super illiquid investments. So it’s really not a case by case. The other thing back to the whole total balance sheet approach is you really got to look at what else is going on in that family’s life. Do they have a big illiquid concentrated stock position?

Do they have a big concentrated business? Oh yes, it’s going to be sold someday. As I always say, everything takes more money, more time than you think. And, you got to balance that. So it’s, again, we have families that have little private exposure and all the way up to 70, 80 percent of our balance sheets.

The other thing that from a vintage diversification standpoint is every vintage brings different themes. I think on the growth equity side, I think, longevity is an interesting thing right now. AI, obviously AI. Look at NVIDIA. Everybody’s talking about AI, but AI is real and it’s impacting everybody’s businesses including my own.

Ben Fraser: Can you explain a little more what vintage means for those that maybe are less familiar with private equity and that concept? 

Paul Karger: Sure. Just like wine. It’s the vintage that, it’s the 2010, 2011, 2012 it’s the 2020, 2021 vintage. Typically private funds straddle, one or two years in terms of them launching a fund, raising a fund and kind of closing on that fund.

And typically managers are coming to market every kind of two to four years. They may have not had full realization on their prior portfolio, depending on where they are in the cap stack and in the kind of the life cycle of these businesses or real estate. Diversification is highly predicated, I’m sorry, diversification, returns are highly predicated in the private world on vintage.

Because you figure if the money’s going to work in a certain year, you’re probably having exits in a certain year. And on the private equity side, maybe those exits are M&A transactions, maybe those exits are IPO. The IPO market has not been great the last 18 months or so. And so there hasn’t been a lot of exits versus 2021 was a huge year for exits in the IPO market.

It may take some time and for example, the truth is the last 10 years, all of this free money, zero interest rate money, forced money in a lot of crazy areas because there was no opportunity cost. So people were willing to go out on the risk curve, looking for return and throwing money all over the place because it was free.

They were borrowing and loving portfolios, they were getting, they didn’t think about it. Whereas, and a lot of stuff got funded over the last decade, frankly should have never gotten funded. Biotech deals were getting done at a hundred times sales like that.

com craziness, 25 years ago. So it’s going to take time for the world to work out those successes. And you read articles every day in the Wall Street Journal, Bloomberg, that private equity firms are tossing the keys to portfolio companies to the banks happening on the real estate side as well.

There will be opportunities, but it’s going to take time. This we’re definitely later in the credit cycle rather than earlier. And it’s going to hit different sectors of the market, different sectors of the economy differently but it’s going to create opportunities, clearly the big opportunity that everyone’s talking about right now in real estate is office, downtown office.

I don’t know how much of an opportunity, that stuff probably needs to trade at 10 cents on the dollar because as taking a downtown New York or San Francisco office building and turning it into a resi is, it’s almost impossible. You gotta dig out the middle, right? Cause you think about these big open floor plates where everybody’s working on one floor and you don’t have a lot of windows in the middle.

You gotta kinda dig out the window, build atriums and you can’t have internal bedrooms that have no windows, in housing. There, there’s some big challenges, but there will definitely be some big opportunities.

Ben Fraser: Talk a little bit about what is your perspective on what does the next 18 to 24 months look like, and obviously this is all conjecture and, you don’t, I know it’s crystal ball, but you’re taking into account everything that you’ve shared and even just, with the risk free rate going where it is now and there, there’s no more free money, at least there might not be for a little while.

How does that change risk appetite? How does that change the types of deals getting done and maybe what’s the consequences throughout the market, the ripple effect through the markets over the next kind of, 24 to 36 months to two, two, three years out, where do you see things playing out?

Paul Karger: Yeah. I think it’s going to be a tale of two cities. I think that, or a tale of 10 cities, I think you’re going to have lots of different things going on in different places, from the equity market perspective, I think you’re going to continue to see a lot of volatility. Equity markets are really focused on rates and, where inflation comes in.

That said, and while equity markets have run up quite a bit this year, it hasn’t been broad. It hasn’t had broad growth. You’ve had the majority of the growth in the equity markets across seven or eight names. And they’ve led, right? The Nvidia’s, the Facebook’s, the world have led and, if you don’t have a real sense of what’s going on if you’re just looking at the headline number on the S& P.

So when you strip out those names, many of those companies are flat to down in a year. So I, I think that, I think that you could be surprised on the upside on the equity markets. That said, very, paradoxically and interestingly is in the private equity world. The last five, six years, pre-pandemic, people were so afraid of equity market valuations.

And so all high net worth, ultra net worth, they’re all hiding out in private equity. Great. So you had this big dearth of capital in private equity in 2020, 2021. And the truth is, the pandemic hit, a lot of these PE managers were sitting on their hands. And then the rate, the rate cycle changed and you had rates go up higher than you’ve ever seen in a couple of decades, very quickly, rapidly, more rapidly than you’ve ever seen.

And it changed their underwriting on private equity. And like I said, you’re seeing articles today about private equity funds literally costing the keys to the bank because they can’t finance these they finance, refinance their business deals, real estate in a much lower rate environment. And also interestingly enough, a lot of the private equity managers just aren’t doing deals today.

They can’t do them. They don’t know where the world is going. So they’re unwilling to place bets from that perspective. They’re waiting for this fat pitch and they’re also highly dependent on debt. And the debt doesn’t make sense, it doesn’t make sense because now you’re looking at mid teens to finance deals.

Ben Fraser: Yeah. A lot of these funds are doing continuation funds where they’re basically just. Selling all the assets in their last fund to their new fund at a higher valuation so they can collect higher fees and realize some of the carry of the new valuations. But the IPO markets aren’t going to realize that for them.

So it’s an interesting world. It’s keeping the same deals going.

Paul Karger: But I think there is going to be opportunity. This is no secret. Everybody’s talking about private credit. The banks have been forced out. As we all know, Uncle Sam has become the biggest competitor with the banks on savings and everybody’s pulling their money out and buying treasuries in their Fidelity Vanguard accounts and they’re not giving it to banks.

And so bank lending is down significantly. And you seem like the First Republic and so on, so worthy by the Jake and Morgans of the world. They’re just not lending like they used to, and it’s just much more expensive. And so there are going to be a lot of interesting opportunities in credit and probably in distress in distressed areas of the market.

And I mentioned higher for longer with the Fed. The longer rates stay higher, the more painful it’s gonna be for many of these companies. And , asset owners that finance their assets at lower levels. And they’re going to have to take, when you’re, when your debt’s rolling off and you’re a building, you’re going to have to take what the market’s giving you.

You’re going to have to pay up and you’re going to eat, you’re going to take it in the shorts in terms of what your NOI looks like, right? And your yield looks like. Yeah. You’re going to have to give it up. 

Ben Fraser: Love it. This rounds out the conversation here. So for someone to say maybe not in the hundred million dollar net worth camp, maybe they’re, sub twenties, they’ve got some, a decent balance sheet to work with.

But. Not quite, maybe quote unquote family office size where they can go hire full time resources and others. What’s your recommendation for people in that five to twenty million dollar net worth range if you know How can they take some of these principles and strategies and approaches of a family office and kind of use that? At maybe a smaller scale?

Paul Karger: Great question, I’m gonna tell you the same thing I do my ultra high net worth families and clients on the liquid side of, the equity side and the fixed income side, don’t overthink it. Really don’t overthink it. You don’t have to overthink it with special managed accounts and this and that.

Keep it simple. There’s so much other stuff that can go wrong in your portfolio and in your life. Keep it simple. We use a lot of these tax managed strategies, which are great, the parametric superiors of the world. For equity exposure and again you take what the market is going to give you and you figure out what’s your, what kind of equity exposure you can live with whether it’s 25 or 45 percent and you live with that and you rebalance.

And the same thing is true on the fixed income side. I think that you know fixed income is an area where you don’t want to be taking lots of risk. You want to know the money’s there. Things are going wrong and it can really serve as a balance in your portfolio. And think about municipal bonds, which makes sense for high net worth families in the five to 15 or 20 million range.

Think about going a little bit further out on the, on, on the duration curve where you are on a yield curve where you can, where you can withstand that duration and where you may not necessarily need the money all tomorrow. And then on the alternative side, think about what you can live with being completely illiquid.

Before you think about what kind of investments you want to make, think about how much illiquidity you can take. And, if you’re at your limit I wouldn’t recommend going out further because you see some crazy, sexy investment that you have to make. I say all the time, focus on the things you can control, what you can really control.

And, as I said earlier in our conversation, you want to make sure it’s sufficient enough where if it works, it makes sense for you. But if it’s not so big that it will blow up your life. And once you decide what portion of your balance sheet makes sense to put to work illiquid, I would do the same thing that we do for our ultra high network families.

I would think about budgeting, putting that money to work over the next few years. In this current environment, you’re getting yield. You can get 5 percent on the one year, so you can, you’re being paid to wait. Two or three years ago, we’d have clients that would show up, prospective clients that would show up and have a big liquidity event.

The money was burning a hole in their pocket. I just made a hundred million dollars, but I need two million dollars a year to live. I’m not getting that. How do I get that? And we’d have to go through this whole, education about, returns aren’t linear and you’ve got to be thoughtful and measured and putting money to work.

Here. A conversation’s a hell of a lot easier because you can hide out treasuries. You don’t need to get the money, you don’t have to burn a hole in your pocket. But really think about where it makes sense to allocate capital. And then look for some diversification. Look for some growth, look for some air, some longevity, some climate firms or whatever, tickle your fancy but also look at the private credit, look at some of these errands and think about how you can get diversification.

The other thing is, we’re not typically not huge fund of funds investors. There are some merits to getting diversification within a trade, you go invest in one particular manager, one particular deal and it doesn’t work out for you. Are you really getting exposure to the private credit space by picking one manager that’s buying in one niche area?

Again, I think you really have to think about how, if this goes wrong, how it impacts your life and what the probability of things going wrong is. Obviously when you have more diversification, there’s just less probability things really go wrong for you.

Ben Fraser: Paul, this has been really insightful.

I appreciate you coming on and sharing all your knowledge. What’s the best way for folks to learn more about your firm or what you do if it 

Paul Karger: Is it interesting to them? Thanks, Ben. You can go right to our website. It’s and there’s all kinds of interesting tidbits.

There’s some case studies on there and there’s a button to contact us if you want to contact us. Appreciate the opportunity. 

Ben Fraser: And just so people understand that you work with kind of a higher echelon of net worth. You have kind of minimum requirements for people that want to work with you, which is roughly.

Paul Karger: We typically, yeah we typically start working with families in the 50 to a hundred range and we go all the way up into billions. 

Ben Fraser: Awesome. All right. Thanks so much, Paul. Appreciate it. And it was really fun having you back on soon and chat more as things evolve.


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